The U.S. property/casualty industry reported improved operating results in 2004 for the second straight year, but for
the first time since 1978, underwriting results were profitable, with a combined ratio of 97.9, according to a special
report released by the A.M. Best Co.

With invested assets--up 17% from year-end 2003--generating actual growth in net investment income, and with a reasonably strong equity market, surplus continued to grow at a healthy 13.5% pace in 2004, and return on equity reached 10.8%. The favorable 2004 results reflect the continuation of growing earned premiums derived from peak pricing in 2003. With premium growth down significantly in 2004 across all segments--most notably in reinsurance and commercial lines--and increasing price competition, A.M. Best expects 2005 growth to slow beyond the paltry 4.7% recorded in 2004.

As a sign of things to come, net premium growth was only a little better than half the percentage increase for 2003. A.M. Best data show that increases in net premiums written have been reduced for the second straight year, from a peak increase of 14.7% in 2002 to 9.5% in 2003 and 4.7% in 2004. With the deceleration of rate increases giving way to price decrements in the latter half of 2004 in most major commercial and reinsurance lines, and with the expectation that this will be the norm in 2005, A.M. Best expects written premium growth will slow to 1.2% in 2005.

However, industry results are likely to remain strong; the generally adequate pricing, prudent underwriting practices and operational efficiencies inherent in the unearned premium reserve at year-end 2004 will continue to benefit underwriting results in 2005, as this premium is earned and losses incurred are held at bay by stringent terms and conditions.

Propelling the industry's above-average financial results were underwriting gains of $6.3 billion, a drastic improvement from the industry's worst year on record, 2001, when an underwriting loss of approximately $53.9 billion was reported, and significantly better than the $5.0 billion loss reported in 2003.

Strong pricing and restrictive policy terms and conditions over the past two years have played a major role in the industry's outstanding underwriting performance, and insurers will need to continue their prudent underwriting practices as rates soften.

As the industry prospers, competition continues to emerge, driving prices down. While pricing in the personal lines segment has remained stable, the commercial and reinsurance segments already have begun their descent.